Key Themes and Takeaways
  • The US labor market is cooling but remains tight by historical standards.
  • Recent employment growth is much slower than during the rapid recovery of 2021 and early 2022 but still above the pre-pandemic average.
  • Year-over-year wage growth is lower than its mid-2022 peak but still above 5%.
  • In-person service sectors have contributed the bulk of recent employment growth, especially Leisure and Hospitality and Private Education and Health Services. These sectors had experienced less rebound in employment than others compared to pre-pandemic levels.
  • Wage growth is slowing most in the in-person service sectors that are gaining the most employment.
  • Hiring and separation rates have fallen nearly to pre-pandemic levels. This will likely lead to the share of short-tenured workers declining toward historical averages during 2023.
  • Hiring remains elevated in several sectors, notably Manufacturing, Transportation and Warehousing, and Private Education and Health Services. New hires in Construction are significantly below pre-pandemic averages.

Economic Outlook

How strong is the US labor market? In recent issues of the Quarterly Economics Briefing (QEB), we highlighted a reduction in labor supply compared to pre-pandemic expectations.See the Q3 2022 and Q4 2022 Quarterly Economics Briefings, ncci.com. Despite the shortfall of workers, employment and wage growth are staying strong as businesses compete to hire any available workers—the labor market is still tight.

But the picture is becoming more nuanced. Three major themes characterize the current status of the labor market.

In this briefing, we examine how these themes arise across labor market indicators, particularly measures of employment growth, wage growth, and hiring rates. By all measures, recent months show signs of significant cooling from the rapid pandemic recovery in 2021 and early 2022 but favorable to workers compared to pre-pandemic averages. Individual sectors may show different patterns than those observed economy-wide, especially in-person service sectors that are still adding a lot of jobs.

We then discuss implications for workers compensation, focusing on change in payroll growth and in the share of short-tenured workers.

Employment and Wage Growth Are Slowing but Still Robust

Employment growth is slowing throughout the economy. In the most recent two quarters, highlighted in orange below, employment growth fell to about 260,000 jobs per month. This is a lot lower than during the rapid recovery period throughout 2021 and the first quarter of 2022, slowing around the same time employment reached its pre-pandemic level in April 2022.

Most employment growth in the last few months has been in in-person services.

Sectoral changes help explain the slowdown in employment growth. In the last few months, employment grew mostly in three sectors that had not yet recovered their pre-pandemic employment. Leisure and Hospitality, Private Education and Health Services, and Other Services (highlighted in orange below) contributed more than two-thirds of all employment growth in the last two quarters.

In contrast, job growth slowed or stopped entirely in sectors where employment had recovered most in the preceding two years. In the last two quarters, employment increased by less than 1% in all remaining sectors other than Construction. Employment growth was flat in Transportation and Warehousing, which had previously been the fastest-growing sector by far, and it fell in both Information and Utilities.

In other words, most sectors have entered a period of more measured employment growth, but in-person services are still catching up. As in-person service employment reaches its new normal, likely in the next six months, overall employment growth will slow down further.

Hourly wage growth decreased from its 2022 peak but remains very high.

Wage growth is slowing, too. Wages increased by 5.1% for production and nonsupervisory workers over the last 12 months, and wage growth for the first quarter of 2023 was only 4.2% annualized. These figures are both well below the year-over-year peak of around 7% early in 2022, and first-quarter growth in 2023 is barely above typical pre-pandemic wage growth of between 3% and 4% per year.

Slower wage growth in the aggregate reflects both smaller raises for individual workers as well as some downward pressure on overall wages from changing worker mix. Leisure and Hospitality employment growth primarily adds low-wage jobs, and increasing the share of these jobs lowers average wages. To better isolate the effect of smaller wage increases, we show in green a measure of year-over-year wage change for matched sample of workers.This is the Atlanta Fed wage tracker, which measures median wage growth for a matched sample of workers who have observed wages 12 months apart. By this metric, wage growth fell a lot less, but it is also below its 2022 peak. In other words, wage growth is slowing for a fixed group of workers, and aggreggate wage growth is falling a bit more because of the changing composition of the workforce.

Wage growth is falling in the same in-person service sectors that are gaining employment.

Next, we compare production and nonsupervisory worker wage growth in the hardest-hit sectors (highlighted previously) compared to all other sectors. In these three in-person service sectors, year-over-year wage growth is 4.4% through the first quarter of 2023; and annualized wage growth for the most recent quarter was only 1.7%.

This is very low even by pre-pandemic standards. In the rest of the economy, Q1 2023 wage growth stayed high at 5.5%, in line with previous quarters.

What happened? During the Great Reshuffle, low-wage workers—especially in Leisure and Hospitality—experienced fast-growing wages both because of strong labor demand within the sector and because of opportunities to move to higher-paying sectors such as Transportation and Warehousing. As employment growth has stalled in other sectors, workers in Leisure and Hospitality and the other hardest-hit sectors have less leverage to demand large pay raises. Wage growth is also falling in these sectors through the addition of more low-paying jobs.

Hiring and Job Turnover are Declining: What Happened to the Great Reshuffle?

Another important characteristic of the pandemic recovery is high labor turnover. As the economy recovered from the employment losses in March and April 2020, businesses posted a record number of job openings, and rates of new hires and worker quits shot up. All three of these rates remain higher than pre-pandemic, but they have been falling since the end of 2021. As with employment and wage growth, not every sector shows the same pattern.

Hiring rates are falling toward pre-pandemic averages.

Hiring rates for much of 2021 and 2022 were 10–15% above pre-pandemic rates. New hires impact workers compensation because short-tenured workers have higher injury rates than full-tenured workers. The likelihood of injuries for short-tenured workers is around twice as high as for full-tenured workers in physically demanding sectors including Manufacturing and Transportation and Warehousing, but one-third to one-half higher for in-person service sectors. In prior research, NCCI found that the Great Reshuffle was likely to produce a modest but meaningful impact on frequency change through this channel.The Great Reshuffle and Injury Frequency, ncci.com, September 28, 2022. This research defined “short-tenured workers” as all those who had been with their current employer for less than one year. The increase in new hires was one aspect of the Great Reshuffle, which was a broader change in the workplace and workforce that also included unusually large movements of workers in and out of the labor force, across occupations and industries, and into remote work.

In the last six months, average hire rates were only 3% higher than in the 12 months immediately preceding the pandemic. Elevated hiring over the last year means there is still an above-average share of short-tenured workers now. But by the end of 2023, the share of short-tenured workers will probably be very close to its long-term average. That means the upward pressure on frequency exerted by more short-tenured workers in 2021 and 2022 could reverse by late 2023 and beyond.

Job separations are following a similar path. Separations were high at the peak of the Great Reshuffle as workers moved from job to job. But as new hire rates have fallen recently, so too have the rates of workers separating from their current jobs: two pieces of the same story of declining job turnover.

Hiring patterns vary a lot by sector.

Although the overall hiring rate is almost back to pre-pandemic rates, this does not hold true in every sector.

Early evidence suggests that changing short-tenured worker share impacted frequency during the pandemic recovery. In 2021, workers compensation frequency increased in the Manufacturing industry group.Workers Compensation Frequency and Severity—An Interactive View, ncci.com, December 15, 2022. We follow this article in discussing frequency for lost-time claims, excluding those from COVID-19. There was also an increase in the Miscellaneous industry group, which includes some of the Transportation and Warehousing sector. While the economy and work environment changed in many ways due to the pandemic, the spike in new hiring and thus of short-tenured workers likely contributed to increased injury frequency.

Changes in hiring do not always mean changes in employment.

The hiring rates shown above may be surprising when considered in conjunction with the pattern of employment growth by sector. Last quarter, Leisure and Hospitality employment continued rising rapidly while Transportation and Warehousing employment stalled, even though hiring rates in the former sector are falling as hiring in the latter stays high. Throughout the pandemic, Construction employment growth exceeded Manufacturing’s even though Construction is making fewer hires than before the pandemic while Manufacturing is making many more.

How can we reconcile these two stories? The explanation is that employment statistics measure net employment change, and hiring is only half of that story. Net employment growth is the difference between hires and separations.These numbers will not be identical because the official statistics on employment change and turnover are published from two different sources with different survey designs, but they are closely related both conceptually and empirically. When we say that private employment increased by about half a million jobs a month in the early recovery, what really happened is that in an average month, businesses made about six million new hires while about five and a half million workers separated from their existing jobs.

Thus, sectors like Manufacturing (and recently, Transportation and Warehousing) have high hiring rates but slow net growth because they are also experiencing more separations than before the pandemic—more worker reshuffling. Leisure and Hospitality has continued its catch-up growth in the last two quarters despite slower hiring because fewer workers are leaving these jobs now than they did at the height of the Great Reshuffle. And Construction employment has increased steadily despite low hiring rates throughout the recovery because businesses have held on tightly to the workers they have.

What Does This Mean for Workers Compensation?

Employment growth began slowing about a year ago, about at the time when the economy achieved its pre-pandemic employment level. Bringing jobs back is easier than creating new ones. As in-person services are approaching their pre-pandemic level right now, employment growth in these sectors will likely slow over the next year, which should bring overall employment growth back down below 200,000 per month.

Wage growth is likely to remain somewhat higher than pre-pandemic rates as long as labor supply is reduced. Labor force participation is slowly rising in 2023, but there is still a large shortfall of workers, and workforce demographics indicate slow labor force growth for years to come. If labor demand continues to cool, wage growth will probably stabilize between 4% and 5% late this year rather than falling all the way to the 3.5–4% observed before the pandemic.

Falling employment and wage growth means slower payroll growth, which in turn tends to translate to slower workers compensation premium growth. This slowdown will be somewhat attenuated by the distribution of the slowdown across sectors, especially because the slowdowns in white-collar sectors such as Professional and Business Services, Financial Activities, and Information have a muted effect. Office and Clerical classes make up about 60% of payroll reported to NCCI but only about 11% of reported premium.Telecommuting and Workers Compensation: What We Know, ncci.com, January 25, 2021. Payroll growth continues to grow steadily in Construction, a critical sector for workers compensation and a contributor of over 30% of reported premium. At the current mix of payroll declines, premium growth is likely to decline by less than payroll growth.

Job turnover is slowing a lot, as both new hires and job separations have fallen almost all the way to pre-pandemic norms. Along with effects to employment and industry mix, job turnover impacts workers compensation because more turnover leads to more short-tenured workers. More short-tenured workers during the pandemic recovery put upward pressure on injury frequency.

In aggregate, a return to pre-pandemic hiring rates should bring short-tenured worker shares to pre-pandemic levels and are likely to reverse any temporary impacts on frequency trends. However, as with employment and wage changes, patterns in job turnover differ markedly by sector: